Industry ponders final GST moves as endgame approaches

June 10, 2018

Paul Smith: EY tax partner

NZ fund managers should have one last crack at lobbying the Inland Revenue Department (IRD) on the proposed GST zero-rating for unit trust fees.

According to Paul Smith, head of indirect tax for the NZ arm of global consultancy firm EY, fund managers have a “narrow window” to put their case to the IRD before any final decision on the fraught GST issue.

Smith said the IRD was likely to wrap up the unit trust decision in a broader GST tidy-up paper due at the end of June.

And in a departure from the original intention to provide a public ruling, any GST change for fund fees – or even confirmation of the status quo – would probably be included in the regular end-of-year tax legislation, he said.

“There would be a limited time to consult [on the broad GST paper] before the tax bill has be drafted – which is usually at the end of the calendar year,” Smith said.

If written into any tax legislation, the fund manager GST fee saga, which has dragged on since 2014, would not be resolved until 2019.

Smith said the long “frustrating” consultation process reflected the difficulty the IRD had in marrying the letter of the law with the current de facto industry arrangement for GST on fees.

The IRD recognised that the long-standing industry agreement to allow managers to charge the 15 per cent sales tax on 10 per cent of unit trust fees “had no basis in GST law”.

However, the IRD’s proposed solution of scrapping the industry hand-shake deal in favour of the bog-standard GST zero-rating for ‘financial services’ had produced a few unintended – and unforeseen – consequences.

Most notably, stand-alone fund management firms would lose the right to claim back GST expenses for third-party services – such as administration – that conglomerate firms could transfer in-house.

“The fact some managers would have to pay a 15 per cent tax on outsourced services [with no expense claim-back facility] is a big issue,” Smith said.

He said the IRD relied primarily on information from the Financial Services Council (FSC) – which brokered the original GST deal for the industry – when starting the policy review.

“But a significant number of managers have different business models to the [typically conglomerate] FSC firms,” he said.

While a number of boutique managers previously banded together to lobby the IRD on the point, Smith said enthusiasm was dwindling after the almost four-year long process.

“In 2014 we had about 10 to 12 managers together – now there’s five or so,” he said.

The long-winded review also highlighted a more fundamental issue on the definition of ‘financial services’, which the fund fee decision hinged on.

“Our GST regime dates back to 1985,” Smith said. “Financial services has moved on quite a lot since then.”